Egypt Social Fund for Development Project External Evaluator: Hajime Onishi Mitsubishi UFJ Research & Consulting Co., Ltd.

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1 Egypt Social Fund for Development Project External Evaluator: Hajime Onishi Mitsubishi UFJ Research & Consulting Co., Ltd. 0.Summary This project was carried out with the objective of satisfying the financial needs of micro and small enterprises in the poverty-stricken regions of Egypt and thereby encouraging job creation and poverty reduction, which is highly consistent with the relevant policies. In the initial stage of the project, it was found that the loan terms did not meet the needs of the users. However, owing to the modification of the loan terms and other efforts, both the cumulative amount of sub-loans (sub-projects) disbursed and the cumulative number of sub-loans approved exceeded the target value. To date, over 30,000 job opportunities have been created, which contributed to some extent to the decline in the unemployment rate in the target areas. In addition, the implementation of the project generated many positive impacts, including substantial improvement in the business conditions of end users. Although the economic disorder caused by the people s revolution in February 2011 is expected to affect debt collection in the future, the ratio of sub-loans in arrears remains low so far, and there is no problem with the operation and maintenance system of the executing agency and intermediary banks. In terms of efficiency, although the implementation period was longer than planned, the project cost did not exceed the planned amount. In light of the above, this project is evaluated to be satisfactory. 1.Project Description Libya Alexandria Cairo Egypt Luxor Aswan Project Sites Sudan Automobile Repair Shop (End-User) in Quena Map of Project Area 1

2 1.1 Background Egypt received structural adjustment loans from the World Bank and the IMF in 1991, which resulted in the country s macro economic recovery. However, the radical economic structural reform required as a condition led to deterioration into poverty and unemployment, and the development of a safety net became an urgent necessity. Under these circumstances, the Social Fund for Development (SFD) was established in 1991 to finance projects for the development of small enterprises, human resources, and the country s regions, with the main objectives of reducing poverty and alleviating the negative impacts of the economic structural reform through the creation of job opportunities and community development. At the time of project appraisal in 2002, 550,000 jobseekers were pouring into the labor market every year due to: 1) the weakening appeal of working in the agricultural sector and the outflow of young people from farming villages as a result; 2) the slowing down of economic growth in oil-producing countries and the return of redundant migrant workers from those countries; and 3) massive job cuts in the public sector as a result of the privatization of public enterprises. Thus, providing and ensuring job opportunities for these unemployed people had been the top priority for the Egyptian government. In the Upper Egypt area, comprising the governorates such as in Assuit and Minya, the poverty rate was particularly high. The Sinai and Suez Canal areas were suffering from high unemployment. These areas were regarded as those where poverty reduction and unemployment measures should be promoted with high priority. 1.2 Project Outline The objective of this project is to meet financial needs of micro and small enterprises (MSEs) and to promote job creation in Upper Egypt and the Suez Canal & Sinai Peninsula by providing soft loans on concessionary terms by way of two financial intermediaries under the Small Enterprise Development Organization (SEDO) of SFD, established by the Government of Egypt, thereby encouraging the reduction of poverty and socio-economic inequalities of the target governorates. Loan Amount / Disbursed Amount Exchange of Notes / Loan Agreement Signing Date Terms and Conditions Borrower / Executing Agencies 5,194 million yen / 5,194 million yen June 2001 / February 2002 Interest Rate: 0.75% (for borrower) Repayment Period: 40 years (Grace Period:10 years) Conditions for Procurement: General Untied The Government of Arab Republic of Egypt / Social Fund for Development (SFD) 2

3 Final Disbursement Date November 2008 Main Contractors (over 1 billion yen) (Not applicable because the project provides soft loans on concessionary terms by way of financial intermediaries) Main Consultant (over 100 million (The same as the above) yen) Feasibility Studies, etc Preliminary Study on Social Fund for Development Project (by JICA) 2000 Financial Conditions Study (by JICA) Special Assistance for Project Implementation (SAPI, by JICA) 2.Outline of the Evaluation Study 2.1 External Evaluator Hajime Onishi (Mitsubishi UFJ Research & Consulting) 2.2 Duration of Evaluation Study Duration of the Study: December, 2010 December, 2011 Duration of the Field Study: June 7, 2011 June 16, 2011 / September 20, 2011 September 21, Constraints during the Evaluation Study The people s revolution, triggered by the Jasmine Revolution in Tunisia, brought about the collapse of the Mubarak regime in February 2011, and Egypt is under the interim military rule of the Supreme Council of the Armed Forces as of November The Socio-economic Development: Long-term Vision 2022 and the 6th Five-year National Programme referred to in the Relevance section below were formulated under the former regime. Since a new government has not yet been formed, the aforementioned national strategy and plan as well as the policies for related sectors were analyzed for this evaluation, for the reader s convenience. 3.Result of the Evaluation (Overall Rating: B 1 ) 3.1 Relevance (Rating: 2 2 ) Relevance with the Development Plan of Egypt Relevance with the national policies At the time of the project appraisal in 2002, the Egyptian government treated the expansion 1 A: Highly satisfactory, B: Satisfactory, C: Partially satisfactory, D: Unsatisfactory 2 3: High, 2: Fair, 1: Low 3

4 of employment opportunities (creating 550,000 job opportunities a year) as a key issue in the long-term development plan, Egypt and the 21st Century (launched in 1997 with the target year set at 2016/17), along with private sector-led high economic growth and the full implementation of compulsory education. At the time, it was emphasized that poverty and the job crunch faced by the young generation was creating a hotbed for Islamic extremists, and therefore, poverty reduction through job creation was indispensable for Egypt in order to remove factors of social unrest. At the time of the ex-post evaluation, the Socio-economic Development: Long-term Vision 2022 for the target year of 2022 (formulated in April 2002 shortly after the project appraisal) set the main objectives of: 1) poverty reduction and the improvement of income distribution; and 2) human resource development and job increase (targeting the creation of 750,000 job opportunities a year), therefore showing that poverty reduction and job increases remain the main pillars of the long-term national strategy. Also in the 6th Five Year National Programme (2007/ /12), 1) achievement of high economic growth (8% a year); 2) job creation (3.8 million job opportunities in five years); and 3) reduction in the unemployment rate (5.5%) are listed among major policy objectives, and thus, employment measures are regarded as an issue of high priority. As stated above, poverty reduction in the poverty regions and job increases have been the major national strategy since the time of project planning through to the ex-post evaluation, and therefore, this project aiming to reduce poverty and eliminate regional disparities through job creation is extremely consistent with the national strategy. Relevance with the sector policies At the time of the project appraisal in 2002, no policy concerning the development of micro, small, and medium-sized enterprises was put in place. The new SME Law No , enacted in 2004 and Enhancing Competitiveness for SMEs in Egypt General Framework and Action Plan, drawn up by the SME Unit of the Ministry of Finance, became the first policy framework for the development of small and medium-sized enterprises in Egypt, which is still in effect at the time of the ex-post evaluation. This policy is oriented toward poverty reduction and income generation through the development of small and medium-sized enterprises, and it underlines the importance of social consideration in enterprise development. In addition, the Multi-Donor Review conducted by SFD donors in 2004 reiterated 1) poverty reduction and 2) job creation as the long-term mission goals of the SFD. From the above, at the time of the ex-post evaluation, the sector policy concerning the development of small and medium-sized enterprises is oriented toward poverty reduction and income generation through enterprise development, and is completely in line with the 4

5 direction aimed at by this project Relevance with the Development Needs of Egypt Table 1 below shows the poverty and unemployment rates in the governorates and the city covered by the project (12 governorates/one city in total, comprising six governorates and said one city in Upper Egypt, including Beni Suef and five governorates in Suez Canal & Sinai Peninsula) in 2001, shortly before the launch of this project, and in 2008, soon after project completion (also detailed in the Impacts section). Table-1: Poverty and Unemployment Rate in Target Governorates and City of the Project Source: Note): Target Governorates / City Poverty Rate (%, Population Ratio) Unemployment Rate (%) 2000/ / / /08 Upper Egypt Beni Suef Minya Assuit Soharg Quena Luxor City Not known Aswan Suez Canal & Sinai Peninsula Port Said Suez Ismailia North Sinai Not known Not known South Sinai Not known Not known National Average Prepared from Institute of National Planning Egypt Human Development Report The Loan Agreement (L/A) of the project was concluded in February 2002 and the date of final disbursement of yen loan from JICA to SFD was November As shown in Table 1, the poverty rates and unemployment rates in the target governorates were still high in As governorate-related data is only available up to 2008, the situation in 2011 is unknown. However, in view of the slowing down of the Egyptian economy after 2008 in the wake of the global financial crisis, the situation in 2011 is assumed to be similar (or deteriorated). Therefore, the needs for job creation and poverty reduction are considered to be present today. On the other hand, as described later in the Efficiency and Effectiveness sections, this project was designed to provide capital investment loans to the manufacturing industry, but the industrial structure in Upper Egypt and Suez Canal & Sinai Peninsula was not exactly 3 The poverty rate (percentage of the population below the poverty line out of the total population) remains high for governorates in Upper Egypt, particularly in Assuit, which has a high rate of over 60%. All six governorates except Aswan have poverty rates above the national average (21.6%). In Minya, Assuit, Sohag, and Quena, the percentage of the population below the poverty line increased from 2000/2001 to 2007/2008. The unemployment rate has declined substantially in the governorates in Upper Egypt, with the exception of Luxor City and Aswan, while relatively high rates are recorded in Suez Canal & Sinai Peninsula, as was observed in In Port Said and Ismailia, in particular, the unemployment rate is over 10%, well exceeding the national average of 8.9%. 5

6 what was assumed for the scheme. Therefore, in the initial stage of the project, a situation arose where the loan terms did not meet the needs of the enterprises. In hindsight, it can be said that the needs assessment prior to the project was not sufficiently reflected in the project design Relevance with Japan s ODA Policy At the time of the project appraisal in 2002, the former Japan Bank for International Cooperation (JBIC) in its implementation policy for overseas economic cooperation projects referred to the development of a social safety net for the socially vulnerable as one of the priority areas of its support for economic structural reform. This project, which aimed to promote job creation by micro and small enterprises and to eliminate regional disparities, is highly consistent with the above policy Relevance with Application of Two-Step Loan Scheme and Consistency with Similar Program At the time of project appraisal in 2002, which was about 10 years after the start of the SFD projects, the SFD had received a total of billion yen in funding from over 20 donors and international organizations, including the World Bank, the EU Fund, and the Arab Fund. Given these circumstances, this project was formed by: 1) limiting the target of support to micro and small enterprises (see the Efficiency section for details); 2) limiting the geographic target areas to the particularly underdeveloped Upper Egypt and Suez Canal & Sinai Peninsula; and 3) setting the main objectives of job creation and economic development in underdeveloped regions. Under the select and focus strategy, which had not been taken in the programs of other donors, the program adopted an approach clearly different from that of other donors. The prime rate (the prime lending rate for enterprises in good standing) quoted by commercial banks in Egypt was around 12% as of the time of project appraisal, a situation that encouraged the use of the SFD, a public fund, for loans to small and medium-sized enterprises. This project was also relevant in that it offered concessional rates for the end users (planned at 7 11%). 5 4 According to JICA s internal documents, the background factors that led to the formation of this project include: 1) high expectations of the Egyptian government for the new scheme provided by the former JBIC (softening of the conditions for providing funds in the cases where loans are extended to human resource development and small and medium-sized enterprise development projects); 2) the urgent need to form the first project after the resumption of ODA lending to Egypt; and 3) the need to s ecure the presence of Japan in an unfavorable environment where many donors were involved and where Japan was lagging behind in SFD projects. 5 As mentioned later, the original loan limit of 200,000 L.E. did not meet the needs of end users in many cases, and as a result, customers defected to other programs and fund sources in the project s beginning. 6

7 Target Governorates/City Figure-1: Location of the Project Site Appropriateness of Selection of Intermediary Banks At the time of project appraisal, the candidates for intermediary banks were rated based on a scoring system, and the National Bank of Egypt (NBE 6 ) and Bank of Alexandria (BOA 7 ) were finally selected as the intermediary banks. The NBE was appropriate as the intermediary bank for this project in that: 1) the ratio of nonperforming loans in the SFD programs (not covered by this project) had been on the decline; and 2) it considered small and medium-sized business financing as a priority sector. In this regard, the right decision was made at the time. As for BOA, on the other hand, various new facts concerning its business performance 8 unfolded one after another in Even though it was difficult to foresee such situations at 6 The National Bank of Egypt (NBE) is the oldest bank in Egypt founded in 1898 and had functioned as the central bank until After the separation and independence of the central bank, it has been operating as a commercial bank. As of 2011, it exists as a national bank and is involved in the financing of 84% of the total loans (in terms of monetary amount) provided. 7 The Bank of Alexandria (BOA) is a national commercial bank founded in 1957 to take over the operations of Barclays Bank, which pulled out of Egypt, and BOA became nationalized in In October 2006, it became an affiliate of the Bank of Intesa Sanpaolo Group of Italy by selling 80% of its outstanding shares to the group, and was converted to a private bank (the name of Bank of Alexandria remains unchanged). 8 The following four facts were found in 2004 (the source is JICA internal document for each case): 1) The asset inspection conducted at the time of the management change in 2004 revealed a high ratio of irregularly performing loans (48%), and the bank suspended the issuance of new loan commitments for one and a half months in the first quarter of 2004; 2) In the SFD programs (not cover ed by this project) in Suez Canal & Sinai Peninsula that BOA was involved in, many loans became nonperforming regarding cattle-rearing and other sectors, and the approval of new loans in these sectors was suspended for a year; 3) The ratio of nonperforming loans in the SFD programs (not covered by this project) that BOA was involved in as of December 2003 was high, at 17.2% for Upper Egypt, 52.7% for Suez Canal & Sinai Peninsula, and 45.5% for other regions; and 4) When the SFD investigated the causes of the increase in the ratio of the nonperforming loans of BOA, it was determined that the factor of a lack of experience cannot be removed, and thus the SFD announced a policy to order BOA to discontinue loans in the livestock industry. 7

8 the time of appraisal due to insufficient information disclosure and other reasons, there remains the question as to whether it was proper to select BOA as a candidate for an intermediary bank and to give high scores to it in ratings at the time of appraisal. BOA was acquired by an Italian investor in 2006 and was converted to a private bank. The new BOA is now proceeding with operational improvements. Based on the above, the implementation of this project has been sufficiently consistent with Egypt s development policy and Japan s support policy, both at the time of project appraisal and ex-post evaluation. On the other hand, the project design did not meet the development needs in some respects, such as the loan terms, which did not meet the needs of the users in the initial stage of the project. Therefore, the relevance of the project is rated as moderate. 3.2 Efficiency (Rating: 2) Project Outputs Table 2 below shows a comparison between the planned and actual outputs of the project. Major changes have been made in the following two points, and others were carried out as planned. Regarding the restrictions on the purposes for which the sub-loan is used, the limit of use for working capital was raised to 70% from 30% of the total amount of each sub-loan after The loan limit was raised to 500,000 L.E. from 200,000 L.E. (Egyptian pounds) per sub-loan after Table-2: Changes in Output Project Components Original Actual Differences (1) Sub-Loans Disbursement Type of end-users Micro and small enterprises (MSEs) The same As planned Sub-loan amount per end-user 5,000 L.E. to 200,000 L.E. Maximum loan amount: Increased up to Changed after 500,000 L.E. after Eligible end-users of sub-loan i) Private entities i) The same As planned ii) Total asset of existing end-users: ii) Total asset: Increased up to 500,000 Changed after 5,000 to 200,000 L.E. (excl. land and L.E. after building) Conditions for sub-loan use Basically for capital investment The limit of working capital: Increased Changed after For working capital: Not exceeding up to 70% of the total amount of each % of the total amount of each sub-loan, after 2008 sub-loan Collateral Land, building, equipment, etc. In addition to the left, third party Mostly as planned guarantor (2)Sub-Loan from SFD to IBs Intermediary banks (IBs) National Bank of Egypt (NBE), and The same As planned Bank of Alexandria (BOA) Interest rate 4 to 8.5% The same As planned 8

9 Project Components Original Actual Differences Repayment period Up to seven years (incl. two years The same As planned grace period at maximum) (3) Subsidiary Loan from IBs to End-Users 7-11% Almost the same (6.5% for some cases) Mostly as planned Interest rate Up to five years (incl. one year grace The same As planned Repayment period period at maximum) (4) Target Governorates for Sub-Loan Upper Egypt Six Governorates and one City (Beni Suef, Mynia, Assuit, Sohag, Quena, The same Aswan and Luxor City) Suez Canal & Sinai Penninsula Five Governorates (Port Said, The same Ismailia, Suez, North Sinai and South Sinai) Source: JICA internal documents and answers to the questionnaires to NBE and BOA As planned As planned The background and detailed reasons for the abovementioned changes are as follows. Changes in the restrictions on the purposes for which the sub-loan is used: As this project was oriented toward providing funds for capital investment mainly in the manufacturing industry, a restriction was imposed to limit the use of loans for working capital to 30% of the total sub-loan amount. On the other hand, as it turned out, the industrial structure of the target areas was not necessarily reflected in the selection of target industries, 9 and as a result, the restrictions on the use of sub-loans imposed in this project did not work to meet the needs of the enterprises that were seeking funding mainly for working capital. Subsequently, based on the results of the analysis conducted through Special Assistance for Project Implementation (SAPI), it was determined appropriate to raise the limit on the use for working capital to 70% of the total amount of the sub-loan. Increase in the loan limit: While the situation was as described above, financing needs for capital investment existed to some extent. However, the initially set loan limit of 200,000 L.E. (equivalent to about six million yen based on the exchange rate at that time) did not meet the needs of the end users in many cases, and as a result, customers defected to other programs and fund sources. 10 In light of these circumstances, and based on the results of the analysis conducted through SAPI, it was determined appropriate to raise the loan limit to 500,000 L.E. It can be highly appreciated that these two problems were detected early on, and that: 1) 9 In Upper Egypt and Suez Canal & Sinai Peninsula: 1) commerce and service industry accounts for a higher percentage than the national average, while the industries requiring capital investment account for only a small percentage; and 2) the major customers of the SFD in these regions have been traditionally those in the livestock industry, apiculture, and the agricultural products processing industry. (Source: JICA internal documents) 10 This is pointed out as one of the factors that held down the growth of lending between 2002 and In addition, according to JICA internal documents, the following two factors are pointed out as the reasons for little growth in lending from the SDF as a whole: 1) Restructuring of the entire SDF was initiated, based on the report of the Multi-donor Review Mission in 2000; and 2) in the process of restructuring, various restrictions were imposed on the operations of the SFD, such as that the signing authority of the managing director of the SFD (the de facto head of the SFD) was limited to the disbursement of up to 50,000 L.E. in (Source: JICA internal documents) 9

10 SAPI was carried out in a timely manner and that 2) the experts in long-term residence at the project site were engaged in SAPI to define the problems in detail, which led to the suggestion of the specific solutions as described above Project Inputs Project Cost The total cost of the project was originally 5,194 million yen (the Japanese ODA loan share was 5,194 million yen) and the actual project cost was 5,194 million yen (the Japanese ODA loan share was 5,194 million yen), which was equivalent to 100% of the original plan. Table 3 shows the amount actually disbursed by JICA to the SFD each year. Table-3: The Amount Disbursed by JICA to the SFD Year Loan Disbursement from JICA (million yen) , , , ,340 Total 5,189 Source: JICA Internal documents Note-1): Exchange rate: 1L.E. = yen (Average between 2003 and 2008) Note-2): The difference between 5,194 mil. yen and 5,189 mil. yen includes the miscellaneous charges, etc. Loan disbursements by JICA to the SFD were made only in the four years of 2003, 2005, 2007, and In the last two years, 2007 and 2008, a total of billion yen was disbursed, which accounts for 50% of the total amount disbursed. No disbursement was made by JICA to the SFD in 2002 and 2004, probably due to: 1) the incompatibility between the loan terms and the needs caused by a gap between the target industries and the industrial structure of the target areas; and 2) the mismatch between the loan amount needed by end users and the loan limit, which resulted in sluggish disbursement by the SFD to the intermediary banks. In addition, no disbursement was made in 2006 because of the contract problem regarding the external auditor of the special account (see the Project Period section below for details) Project Period The project was scheduled from February 2002 to December 2006, a period of 59 months, but it extended to 82 months, from February 2002 to November 2008, 11 which was equivalent 11 The project is deemed to have started in February 2002 when the signing of the L/A took place and completed with the disbursement deadline in November

11 to 139% of the original plan. As a result, the project period was longer than planned. The main causes of delay were: 1) delay in procedures at the start of project (delayed by about a year); 2) sluggish growth in lending during the early years of the project; and 3) the suspension of disbursement from JICA (for two years) due to the contract problem concerning the external auditor of the special account. Regarding the delay in procedures in 1) above, after the signing of the L/A for the project in February 2002 as scheduled, a series of procedures were taken, including i) ratification by the parliament, ii) publication of a government gazette, iii) establishment of the special account, iv) negotiation with the intermediary banks on terms & conditions and the consent of JICA, and v) the effectuation of a Presidential Decree concerning the project. According to SFD-SEDO (SEDO: Small Enterprise Development Organization), which is responsible for the project, they could not start work relating to the project until the process of i) to v) was cleared. As a result, the start of the full operation of the project was delayed until February The main reasons for the sluggish growth in lending during the early years of the project as mentioned in 2) above are summarized as follows, based on JICA internal documents and the interview with the SFD staff concerned: i) restructuring of SEDO and confusion in its operation; ii) the gap between the aim of the loan scheme and the industrial structure of the target area; 13 iii) the loan limit (up to 200,000 L.E); iv) flaws in the selection of intermediary banks 14 and delay in understanding lending conditions; 15 v) the limit on the use of loans for working capital; and vi) competition with the programs of other donors. Regarding vi) above, it is pointed out that the program by the EU that was implemented around the same time as this project was given higher priority at SEDO and the NBE, and, as a result, this project was slow in progress. 16 The contract problem regarding the external auditor of the special account in 3) occurred as 12 SEDO insists that it is appropriate to consider the date of effectuation of v) to be the start of the project. (Source: Answers to the questionnaire to SFD and results of interviews with SFD) If their views were adopted, the actual project period would have been 70 months from February 2003 to November 2008 (119% of the planned period). Even so, the rating of efficiency ( 2) would not be affected. 13 Details are as already stated in Outputs. As the target areas of the project were underdeveloped, the manufacturing industry had not yet developed sufficiently, while the enterprises in agriculture and related industries, commercial, and service industries accounted for the majority of enterprises in the target areas. Therefore, lending for capital investment, which was initially the main objective of the project, was not expected to be promoted under such an industrial structure as described above. 14 As of 2004, BOA made all the sub-loans in Suez Canal & Sinai Peninsula subject to headquarter approval, which substantially prevented the formation of sub-projects and also led to the suspension of lending to the agriculture-related sectors. (Source: JICA internal documents) 15 The lack of sufficient instructions to the intermediary banks on the conditions for lending (the percentage of the amount to be used for working capital in the total amount of the sub-loan, the types of end users eligible for sub-loans, and loan limits, etc.) made it difficult for them to carry out business operations in an efficient manner and also constituted an obstacle in the acquisition of new customers. (Source: Results of interviews with the JICA Egypt Office, intermediary banks, and the regional offices of the SFD, etc.) 16 Since the deadline for disbursement under the EU program for SEDO was set at the end of 2004, the resources of SEDO and the NBE as the intermediary bank were used intensively in order to use up the funds provided under the program before the deadline. (Source: JICA internal documents) 11

12 the SFD terminated the contract with the existing auditor due to difficulties in the negotiations for an additional contract and as the SFD invited bids to select a new auditor. The position of the external auditor was left vacant for some period of time during which no disbursement was made according to the provisions of the L/A. Although the project cost was lower than planned, the project period was longer than planned (139% of the original plan), therefore efficiency of the project is fair. 3.3 Effectiveness (Rating: 3) Quantitative Effects Results from Operation and Effect Indicators (1) Cumulative amount of sub-loans disbursed 17 Under this project, 5,395 sub-projects were approved and a total of million L.E. was disbursed as sub-loans from the SFD. Thus, the quantitative target for fund supply to micro and small enterprises in the target areas has been achieved. Most of the funds were disbursed in 2005, 2006, and It is assumed that the increase in disbursement in 2005 and 2006 is attributable to the leverage effect of SAPI (intended to promote lending through the long-term dispatch of experts) by the former JBIC, and the disbursement in 2008 was boosted by the easing of lending conditions and the jump in the number of sub-loans approved toward the disbursement deadline of the project. 18 The fact that about 40% of the total amount disbursed was concentrated in 2008 indicates that a sort of last-minute push was made. Operation and Effect Indicators (Unit) Operation Indicators Cumulative Amount of Sub-Loans Disbursed For National Bank of Egypt (NBE) For Bank of Alexandria (BOA) The Number of Sub-Loans (Sub-Projects) Approved For National Bank of Egypt (NBE) For Bank of Alexandria (BOA) The Number of Sub-Loans (Sub-Projects) in Arrear For National Bank of Egypt (NBE) For Bank of Alexandria (BOA) Table-4: Achievement Rate of Main Indicators Target Value (Expected Completion Year, 2009) a 187 million L.E. n.a. n.a. 5,342 n.a. n.a. Not known Not known Not known Actual Value (As of 2011) b 264 million L.E. 223 million L.E. 41 million L.E. 5,395 4, Achieveme nt Ratio b/a Effect Indicators Cumulative Number of Job Opportunities Created 18,700 31, % Source: JICA internal documents, and answers to the questionnaire to SFD and National Bank of Egypt (NBE) % 101% n.a. 17 It is argued that the achievement of sub-loan disbursement should be evaluated as an efficiency item. Given that the main objective of this project is to satisfy the financial needs of micro and small enterprises, it is decided to be evaluated as an effectiveness item. 18 As mentioned in the Efficiency section, sub-loan disbursement concentrated in 2008 largely because the funds for lending were not available until late 2007 due to the suspension of disbursement from the former JBIC to the SFD from 2005 to the middle of

13 Note): The percentage of the number of sub-loans in arrear to the total number of sub-loans (sub-projects) approved is 5.3% (=285/5,395) 6, ,000 Cumulative Number of Sub- Projects The Number of Sub-projects 4,000 3,000 2,000 Cumulative Amount of Loan Disbursed Amount of Loan Disbursed (Mil.L.E.) 1, Year 0.00 Figure-2: Cumulative Number of Sub-projects and Amount of Loan Disbursed The data of sub-loans disbursed in each governorate and city in the target areas shows that the amount disbursed is unevenly distributed, as the disbursement was concentrated in specific governorates. About 70% of the number of sub-loans and 63% of the amount is concentrated in the top three governorates (Minya, Assuit, and Quena). In order to examine the situation of the uneven distribution of sub-loan disbursement, the number of sub-loans and the amount disbursed per 100,000 people below the poverty line were calculated using the data on population below poverty line for each governorate/city in 2008/2009. As shown in Table 5, a conspicuously large amount was disbursed in Suez, Aswan, Port Said, and Minya. The above facts show an excessive concentration of lending in Minya. Assuming that there was no specific strategic intention (or no region-wise target set for the amount of disbursement), efficiency in lending and the fair implementation of the project are questioned. Table-5: Annual Sub-Loan Disbursement by Target Governorates and City Unit: Million L.E. Target Governorates / City Cumulative Amount Amount Disbursed Per 100,000 People Below the Poverty Line Upper Egypt Beni Suef Minya Assuit Soharg Quena Luxor City Aswan Sub-Total

14 Target Governorates / City Cumulative Amount Amount Disbursed Per 100,000 People Below the Poverty Line Suez Canal & Sinai Peninsula Port Said Suez Ismailia North Sinai N.A. South Sinai N.A. Sub-Total Source: Total Answers to the questionnaire to SFD (The data of amount disbursed per 100,000 people below the poverty line were calculated by the evaluator.) Also as mentioned above, about 40% of the total amount disbursed was concentrated in 2008 the year when the conditions for lending were eased. The rapid increase in the number of sub-loans approved over a short period of time raises the concern that the examination of loan applications may have not been strict enough. A close watch needs to be kept on the repayment situation of the sub-loans approved in (2) Sub-loans disbursed by sectors As shown in Table 6, lending to tertiary industries accounted for nearly 70% of the total amount disbursed, with the wholesale and trading industry making up nearly 40% and the service industry accounting for 26%. Lending to the manufacturing industry, which was designated as the main target industry at the project design phase, accounted for less than 10% of the total, due to the abovementioned issue of loan limit and other factors that held back the growth in the number of sub-loans extended. Table-6: Sub-Loans Disbursed By Sectors Indicators Service Trading Manufacturing Agriculture Others Cumulative Amount (Mil. L.E.) Percentage (%) Source: Answers to the questionnaire to SFD (3) Satisfaction of financial needs of MSEs in the target governorates/city As stated in the Relevance section, the poverty rate is high in the governorates in Upper Egypt. As of 2008, all six governorates in the target areas of the project except Aswan have poverty rates higher than the national average (21.6%). In Minya, Assuit, Sohag, and Quena, the percentage of population below the poverty line increased over 2000/2001. As the data on the financial needs of micro and small enterprises is not available, this is only speculation, but there was presumably a strong need for funds to micro and small enterprises in Minya, Assuit, Sohag, and Quena where the percentage of the population below the poverty line was increasing. In this project, although the disbursement of sub-loans was concentrated in Minya, a 14

15 certain amount of sub-loans were disbursed also in Assuit, Sohag, and Quena. It can be said that this project made a certain contribution to satisfying the financial needs of micro and small enterprises in these regions. On the other hand, further financing may have been needed for the end users in Sohag (where the amount disbursed per 100,000 members of the population below the poverty line is 1,460,000 L.E., the lowest among target governorates). (4) Job creation The number of job opportunities created was probably calculated by dividing the total amount disbursed by a certain coefficient, as shown in Table 7. Therefore, the number of job opportunities created presented in Table 4, or 31,320, is not the actual figure. In the meantime, the results of the in-depth interviews with end users 19 suggest that the coefficient established by the SFD is higher than the actual value. In other words, as explained in footnote 19, the actual number of job opportunities created is estimated to exceed the abovementioned figure calculated by the SFD Table-7: Job Creation Co-efficient - Calculating Method for Job Creation under SFD Program Indicators (Unit) SFD s Estimate 1) The number of job creation per sub-project (people) The average amount of sub-loan per sub-project (L.E.) The amount of loan needed to create unit (1) employee (L.E.) (Average from 2000 to 2003) MDRM s Estimate 2) (Average from 1997 to 1999) MDRM s Estimate 3) (For 2004) Post Evaluator s Estimate #1 4) (Average from 2002 to 2008) Post Evaluator s Estimate #2 5) (Average from 2002 to 2008) (4.1 for new loans) 21,924 20,775 31,273 49,010 49,010 5,516 9,656 11,666 8,442 6,216 Source: Prepared from JICA internal documents and answers to the questionnaire to SFD Note-1): Data of the whole SFD program including this project after 2002 (Original source: SFD) Note-2): Data of the whole SFD program (Original source: Multi Donor Review Mission (MDRM) Report in 2000) Note-3): Data of the whole SFD program including this project after 2002 (Original source: Report prepared by impact assessment team at the Multi Donor Review Mission-II (MDRM-II) in 2004) Note-4): Data relates only to this project. Estimated from answers to the questionnaire sent to the SFD. Note-5): Data relates only to this project. Estimated from results of in-depth interviews with end-users. To monitor the number of job opportunities created, the following three methods are available to the SFD, in addition to the coefficient method described above: 1) actual counting by field officers; 2) the acquisition of data based on quarterly reports submitted by intermediary banks; and 3) checking against the employment data owned by the social 19 The amount of loan needed to create employment for one person is estimated at 8,442 L.E. for this evaluation, as shown in Table 7. This amount is a little lower than those estimated by the Multi-Donor Review Mission ( 9,656 L.E./person in 2000, 11,666 L.E./person in 2004). As described later in the Impacts section, according to the results of the in-depth interviews with a total of 23 enterprises as end users, the average number of job opportunities created per sub-project (sub -loan) is Based on this figure, the total number of job opportunities created should be 42,538 (=7.88 x 5,395). Suppose that those end users interviewed represent an average sample of population ( 5,395), SFD s estimation for the number of job opportunities created, or 31,320, seems to be an overly severe estimation. 15

16 insurance offices of the target regions. Methods 1) and 2) have faults in terms of the frequency of counting and reliability, while 3) is considered impractical because it is complicated, although accurate. However, considering that the number of job opportunities created is the most critical indicator for SFD-SEDO to determine the relevance of the project and the meaning of its existence, it is advisable to establish a more precise data collection system. 20. (5) Market interest rate and sub-loan amount In a previous two-step loan project, it was pointed out that, As the market interest rate declined substantially during the project period, the sub-loan interest rate neared the market interest, and as a result, the growth of loan disbursement slowed down. Whereas in this project, no situation arose where the sub-loan interest rate came closer to the market interest rate, 21 and there is no correlation between the sluggish growth of disbursement at the beginning of the project with changes in the market interest rates Results of Calculation of Internal Rates of Return ( Economic Internal Rate of Return) This project is to provide soft loans on concessionary terms; therefore the EIRR was not recalculated Qualitative Effects The effects of unemployment reduction and the elimination of regional disparities, etc., have been generated. Details are to be discussed in the Impacts section Conclusion of Effectiveness Evaluation As shown in Table 4, the target values set at the time of appraisal have been achieved in all of the three indicators for operation and effect, namely: 1) Cumulative amount disbursed under sub-projects (sub-loans), 2) cumulative number of sub-projects (sub-loans) approved, and 3) the number of job opportunities created. Judging from these achievements, the project was highly effective. With respect to indicators 1) and 2) above, the uneven distribution of sub-loans by region was observed. The objective of this project was to satisfy the financial needs of micro and small enterprises and thereby encourage job creation in Upper Egypt and Sinai Peninsula & Suez Canal. However, the differences among regions in benefits were too large to be attributed solely to the problem of efficiency (i.e. targets were achieved while there was a 20 In this regard, SEDO started monitoring the number of job opportunities created as of September (Source: Results of interview with an official in charge at SEDO) 21 The prime lending rate in Egypt hovered around the 13 14% range from 2002 to (Source: World Development Indicators) 16

17 problem in the process of project implementation). As mentioned in the Efficiency section, there were presumably some problems with the selection of target areas and the establishment of the conditions for lending at the time of appraisal. 22 By sector, lending to the wholesale and trading industry accounts for by far the largest part (nearly 40%) of all lending under sub-projects (sub-loans), while lending to the manufacturing industry, which was initially the target industry, accounts for slightly less than 10% due to the abovementioned reasons. Looking at the number of job opportunities created, the number exceeded by more than 1.5 times that expected at the time of project appraisal. As explained above, 31,320 is not the actual number of job opportunities created, though it is not an unrealistic figure either. The actual number of job opportunities created is estimated to have exceeded the above figure. The proportion of the number of sub-loans that became irrecoverable is low at 5.3%. This project has largely achieved its objectives; therefore its effectiveness is high. 3.4 Impact Intended Impacts (1) Reduction in the unemployment rate and the situation of poverty reduction in the target governorates/city As shown in Table 8, changes in the unemployment rate and the situation of poverty reduction during the period from 2003/04 to the completion of the project differ greatly by governorates/city. Looking at the unemployment rate in Minya, Assuit, Quena, and Aswan, which ranked high in the number of sub-projects of this project, the rate has improved between 2003/2004 when the economy bottomed out 23 and between 2007/2008 when the project was completed. In Minya, Quena, and Aswan in particular, the unemployment rate declined by more than 40%, 22 At first glance, the benefits brought to Sinai Peninsula & Suez Canal seem to be much smaller than those brought to Upper Egypt both in terms of the number of sub-projects and the amount disbursed. However, when comparing those figures per 100,000 people below the poverty line, for example (see Table 5 for details), the results indicate that those regions received larger benefits than Upper Egypt. 23 Economic situation in Egypt in the 2000s: In Egypt, the Luxor incident in 1997, etc., caused a significant economic downturn in the late 1990s. In addition, other factors such as: 1) a sharp drop in the tourism revenue, 2) the slump of export of oil products due to weak oil prices on the global market, and 3) the downward trend of remittances from workers overseas that resulted from a decrease in Egyptian workers in Gulf countries restrained economic growth at a low level around the lower end of the 3% range until 2002/2003. Then, the introduction of the floating exchange rate system in 2003, which helped stabilize the macro economy, and the economic reform pushed through by the Nazif administration that took office in July 2004 put the economy back on track during the period from 2005/2006 until the wake of the global financial crisis in the second half of Such deterioration in the macro economy as described above has a critical impact on indicators such as the unemployment rate and poverty rate. Therefore, due attention must be paid to the movement of various indicators during the period from 2002, when the project started, to In addition, as mentioned in Project Period and Efficiency, disbursement under the project was slow until boosted by SAPI in All these things considered, it would be appropriate to focus on changes in various indicators after 2003/2004 when evaluating the impacts of this project. 17

18 which is much higher than the national average rate of decrease in the unemployment rate (from 9.9% to 8.9%, a decreased of 10%). Considering that various factors including economic recovery contributed to the improvement of these indicators, it cannot be said that only this project had impacts that caused these improvements. Even so, this project is believed to have made a certain contribution to the decline in unemployment rates in these regions through the lending to micro and small enterprises and through the promotion of job creation as described later. 24 Target Governorates / City Table-8: Poor Persons of Total Population, Gini Co-Efficient, Unemployment Rate and Wages of Poor Household of Total Wages in Target Areas Poor Persons of Total Population (%) Gini Co-efficient Unemployment Rate (%) Wages of Poor Households of Total Wages (%) 2000/ / / / / / / / / / / /08 Upper Egypt Beni Suef Minya Assuit Soharg Quena Luxor City Not known Not known Not known Aswan Suez Canal & Sinai Peninsula Port Said Suez Ismailia North Sinai Not known Not known Not known Not known Not known Not known Not known Not known Not known South Sinai Not known Not known Not known Not known Not known Not known Not known Not known Not known National Average Source: Prepared from Institute of National Planning Egypt Human Development Report Note-1): Some data are the same with those in Table 1. Note-2): The fiscal year in Egypt runs from July 1 through June /01 in the above table demonstrates the date from July 2000 to June Among the data related to poverty, the percentage of the population below the poverty line, for example, shows improvement only in three governorates of Aswan, Minya, and Beni Suef (although improvement was observed also in Port Said and Suez, they are excluded for the reason described below). As for Gini coefficient, the national average improvement rate (from to 0.310, an improvement of 12%) was exceeded only in the two governorates of Beni Suef (improved by 19%) and Quena (improved by 13%) in the same period. In the target areas of the project, the unemployment improved very rapidly between 2003/2004 and 2007/2008. However, the redistribution of income did not take place accordingly, and poverty reduction was not brought about with the exception of a few regions. In Suez Canal & Sinai Peninsula, as already stated in the Effectiveness section, 1) the 24 In Miniya, Quena, and Aswan, for example, the number of unemployed decreased by 133,000 in total from 2004 to 2007 ( Data source: Calculated based on the Institute of National Planning s Egypt Human Development Report ). In the meantime, employment for an estimated 17,000 persons was created in the above-named three governorates ( Data source: Questionnaire answers by SFD), indicating that this project greatly contributed to the decline in the unemployment rate in those three governorates. 18